Case 5:01-cv JW Document 513 Filed 05/04/2006 Page 1 of 41

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1 Case :0-cv-0-JW Document Filed 0/0/00 Page of LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP WILLIAM S. LERACH () SPENCER A. BURKHOLZ (0) DANIEL S. DROSMAN (00) JONAH H. GOLDSTEIN () MATTHEW P. MONTGOMERY (0) LUCAS F. OLTS () JESSICA D. TALLY () West Broadway, Suite 00 San Diego, CA Telephone: /- /- (fax) and PATRICK J. COUGHLIN (0) LESLEY E. WEAVER (0) 0 Pine Street, Suite 00 San Francisco, CA Telephone: /- /- (fax) PatC@lerachlaw.com LesleyW@lerachlaw.com Co-Lead Counsel for Plaintiffs [Additional counsel appear on signature page.] LEVIN, PAPANTONIO, THOMAS, MITCHELL, ECHSNER & PROCTOR, P.A. TIMOTHY M. O BRIEN (pro hac vice) South Baylen Street, Suite 00 Pensacola, FL 0 Telephone: 0/-000 0/-0 (fax) 0 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION In re CISCO SYSTEMS, INC. SECURITIES LITIGATION This Document Relates To: ALL ACTIONS. ) ) ) ) ) ) ) ) Master File No. C-0-0-JW(PVT) CLASS ACTION PLAINTIFFS OPPOSITION TO THE CISCO DEFENDANTS AND PRICEWATERHOUSECOOPERS LLP S MOTIONS FOR SUMMARY JUDGMENT ON LOSS CAUSATION DATE: June, 00 TIME: :00 a.m. COURTROOM:, Fourth Floor JUDGE: Honorable James Ware

2 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 TABLE OF CONTENTS Page I. Plaintiffs Have More than Sufficiently Raised a Genuine Issue of Material Fact that Defendants Misstatements and Omissions Proximately Caused Their Economic Loss... A. Defendants Repeatedly Ignore the Controlling Standard of Summary Judgment... B. According to Binding Precedent, a Corrective Disclosure Need Not Mirror the Subject of the Alleged Misstatements so Long as the Disclosure Provides an Indication of the Company s True Financial Condition in Contrast to Earlier Misstatements... C. Plaintiffs Evidence Creates a Genuine Issue of Material Fact that Cisco s February, 00, Disclosure of Its True Financial Condition in Contrast to Defendants Earlier Misrepresentations and Omissions During the Class Period Caused Plaintiffs Economic Loss.... Defendants Use of Their Causation and Damages Experts Opinions to Purportedly Undermine Plaintiffs Credible Evidence of Loss Causation Creates a Battle of the Experts that Precludes Summary Judgment.... Plaintiffs Evidence Creates a Triable Issue of Fact Concerning Whether Cisco s February, 00, Disclosure Related to the Subject of Defendants Earlier Misstatements.... Plaintiffs Evidence Raises a Material Issue of Fact as to Whether the February, 00, Announcement Caused the Market to Question the True State of Cisco s Business and Removed the Price Inflation Caused by Defendants Earlier Misstatements.... Plaintiffs Have Proffered Credible Evidence that Cisco s February, 00, Announcement Was a Revelation of the True State of Cisco s Business in Contrast to Earlier Misstatements Relating to the Strength of that Business.... Plaintiffs Credible Evidence that Cisco s February, 00, Disclosure of Its True Financial Condition Related to Defendants Accounting Improprieties Raises a Triable Issue of Fact... D. Summary Judgment Should Be Denied as to Cisco s Remaining Loss Causation Arguments.... Dr. Nye Properly Removed the Effect of Non-Fraudulent Information from the Decline in Cisco s Stock Price on February, Plaintiffs Offer More than Sufficient Evidence to Create a Triable Issue of Fact Whether Cisco s November, 000, and December, 000, Guidance Materially Inflated Cisco s Stock Price... CAUSATION - C-0-0-JW(PVT) - i -

3 Case :0-cv-0-JW Document Filed 0/0/00 Page of Page II. Conclusion... 0 CAUSATION - C-0-0-JW(PVT) - ii -

4 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 CASES TABLE OF AUTHORITIES Page Anderson v. Liberty Lobby, Inc., U.S., S. Ct. 0, L. Ed. d 0 ()... Dura Pharms., Inc. v. Broudo, U.S., S. Ct., L. Ed. d (00)... passim First Nat'l Bank v. Cities Serv. Co., U.S., S. Ct., 0 L. Ed. d ()... Freeland v. Iridium Word Commc'ns, Ltd., F.R.D 0 (D.D.C. 00)... In re Blech Sec. Litig., No. Civ. (RWS), 00 U.S. Dist. LEXIS 0 (S.D.N.Y. Mar., 00)... In re Bristol-Myers Squibb Sec. Litig., No (SRC), 00 U.S. Dist. LEXIS (D.N.J. Aug., 00)..., In re Daou Sys., F.d 0 (th Cir. 00), cert. denied, U.S., S. Ct., L. Ed. d (00)... passim In re Elec. Data Sys. Corp. Sec. & ERISA Litig., F. Supp. d (E.D. Tex. 00)... In re Enron Corp. Sec., No. MDL-, 00 U.S. Dist. LEXIS 0 (S.D. Tex. Dec., 00)... In re Gaming Lottery Sec. Litig., No. Civ. (RPP), 000 U.S. Dist. LEXIS (S.D.N.Y. Feb., 000),, vacated, remanded sub nom. on other grounds, F.d (d Cir. 00)... In re Imperial Credit Indus. Sec. Litig., F. Supp. d 0 (C.D. Cal. 00)... In re Initial Pub. Offering Sec. Litig., F.R.D. (S.D.N.Y. 00)... In re JDS Uniphase Corp. Sec. Litig., No. C 0- CW, 00 U.S. Dist. LEXIS 0 (N.D. Cal. July, 00)... CAUSATION - C-0-0-JW(PVT) - iii -

5 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 Page In re JDS Uniphase Corp. Sec. Litig., No. C 0- CW, 00 U.S. Dist. LEXIS 0 (N.D. Cal. Jan., 00)... In re Loewen Group Inc. Sec. Litig., F. Supp. d (E.D. Pa. 00)..., In re Ribozyme Pharms. Sec. Litig., 0 F. Supp. d 0 (D. Colo. 00)... In re VeriSign Sec. Litig., No. C 0-00 JW (PVT), 00 U.S. Dist. LEXIS (N.D. Cal. Jan., 00)..., In re Winstar Commc'ns, No. 0 CV 0 (GBD), 00 U.S. Dist. LEXIS (S.D.N.Y. Feb., 00)... In re Worldcom, Inc. Sec. Litig., F. Supp. d (S.D.N.Y. 00)... Lentell v. Merrill Lynch & Co., F.d (d Cir. 00)... Manchak v. N-Viro Energy Sys. Ltd., F. Supp. (C.D. Cal. )... Miller v. Asensio & Co., F.d (th Cir. 00)..., Montalvo v. Tripos, Inc., No. :0CVSNL, 00 U.S. Dist. LEXIS (E.D. Mo. Sept. 0, 00)... Plumbers & Pipefitters Local Pension Fund v. Cisco Sys., F. Supp. d, 00 U.S. Dist. LEXIS (N.D. Cal. 00)..., RMED Int'l, Inc. v. Sloan's Supermarket's, Inc., No. Cir. (PKL) (RLE), 000 U.S. Dist. LEXIS (S.D.N.Y. Apr., 000)... Ritchie v. United States, No. C MHP, 00 WL (N.D. Cal. May, 00)... Robbins v. Koger Props., F.d at (th Cir. )... CAUSATION - C-0-0-JW(PVT) - iv -

6 Case :0-cv-0-JW Document Filed 0/0/00 Page of Page Spirit Airlines, Inc. v. Northwest Airlines, Inc., No. 0-, 00 U.S. App. LEXIS (th Cir. Dec., 00)... Semerenko v. Cendant Corp., F.d (d Cir. 000)... Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 0 F.d (d Cir. 00)... Tran v. Captain Glyn, Inc., 0 F. Supp. (D. Haw. )... Wyler Summit P'ship. v. Turner Broad. Sys., F.d (th Cir. 000)...,, STATUTES, RULES AND REGULATIONS U.S.C. u-(b)()... 0 CAUSATION - C-0-0-JW(PVT) - v -

7 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 I. Plaintiffs Have More than Sufficiently Raised a Genuine Issue of Material Fact that Defendants Misstatements and Omissions Proximately Caused Their Economic Loss Defendants contend that plaintiffs are unable to establish loss causation, arguing that Cisco Systems, Inc. s ( Cisco or the Company ) February, 00, failure to meet earnings estimates for Q0 and revising guidance to flat to down % growth for Q0 and Q0 did not reveal the truth relating to Cisco s misstatements and omissions throughout the Class Period (November, to February, 00). Defendants are wrong. As demonstrated below, plaintiffs evidence raises a triable issue of fact that defendants misstatements and omissions artificially inflated the price of Cisco stock and that Cisco s February, 00, revelation of its true financial condition, in contrast to each of the categories of defendants earlier misstatements, removed the inflation from the stock and caused plaintiffs loss. Accordingly, summary judgment should be denied. A. Defendants Repeatedly Ignore the Controlling Standard of Summary Judgment Preliminarily, throughout their motion, defendants contend that plaintiffs are unable to prove loss causation at this stage. See Defendants Cisco Systems, Inc., John T. Chambers and Larry R. Carter s Notice of Motion and Motion for Summary Judgment; Memorandum of Points and Authorities in Support of Motion ( Cisco s Motion ) at -, ; Defendant PriceWaterhouse Coopers LLP s Notice of Motion and Motion for Summary Judgment on Loss Causation and Damages; Memorandum of Points and Authorities in Support Thereof ( PWC s Motion ) at. As the Court is well aware, plaintiffs are not required at summary judgment to prove any elements of their claims but rather, need only raise a triable issue of material fact. Anderson v. Liberty Lobby, Inc., U.S., 0, S. Ct. 0, L. Ed. d 0 (). Unlike the scrutiny to be applied to plaintiffs proof at trial, the Court at this stage does not weigh conflicting evidence with respect to a disputed material fact or make credibility determinations; such determinations are solely within the province of the jury. Id.; First Nat l Bank v. Cities Serv. Co., U.S., -, S. Ct., 0 L. Ed. d (); In re VeriSign Sec. Litig., No. C 0-00 JW (PVT), 00 U.S. Dist. CAUSATION - C-0-0-JW(PVT) - -

8 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 LEXIS, at *-* (N.D. Cal. Jan., 00). Indeed, the Court must draw all reasonable inferences in favor of the non-moving party. Verisign, 00 U.S. Dist. LEXIS, at *-*. B. According to Binding Precedent, a Corrective Disclosure Need Not Mirror the Subject of the Alleged Misstatements so Long as the Disclosure Provides an Indication of the Company s True Financial Condition in Contrast to Earlier Misstatements Under the Private Securities Litigation Reform Act of (the PSLRA ), plaintiffs must eventually prove that defendants securities fraud caused their economic loss. U.S.C. u- (b)(). The statute provides in relevant part: Loss Causation. In any private action arising under this [chapter], the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this [chapter] caused the loss for which the plaintiff seeks to recover damages. Id. [W]hether loss causation has been demonstrated presents a public policy question, the resolution of which is predicated upon notions of equity. Suez Equity Investors, L.P. v. Toronto- Dominion Bank, 0 F.d, (d Cir. 00). Recently, the Supreme Court in Dura Pharms., Inc. v. Broudo, U.S., S. Ct., L. Ed. d (00), clarified the loss causation pleading and proof requirement in securities fraud cases. In Dura, the Supreme Court reversed the Ninth Circuit s pleading rule for loss causation in securities fraud actions, which had required allegations of nothing more than price inflation at the time of plaintiff s purchase. Id. Dura held that a plaintiff must prove [at trial] that the defendant s misrepresentation (or other fraudulent conduct) proximately caused the plaintiff s economic loss. Id. at -. Under Dura, however, A plaintiff is not required to show that a misrepresentation was the sole reason for the investment s decline in value in order to establish loss causation. In re Daou Sys., F.d 0, (th Cir. 00), cert. denied, U.S., S. Ct., L. Ed. d (00). As long as the misrepresentation is [a] substantial cause of the Dura focused on whether the plaintiffs at the motion to dismiss stage had adequately pled loss causation. This Court has already held that plaintiffs satisfied that pleading standard. See Plumbers & Pipefitters Local Pension Fund v. Cisco Sys., F. Supp. d, 00 U.S. Dist. LEXIS, at *-* (N.D. Cal. 00). Emphasis is added and citations are omitted, unless otherwise noted. CAUSATION - C-0-0-JW(PVT) - -

9 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 investment s decline in value, other contributing forces will not bar recovery under the loss causation requirement.... Id.; see Miller v. Asensio & Co., F.d,, (th Cir. 00) (loss causation requires only that the plaintiff show that the defendant s conduct was a substantial cause of its injury ); Semerenko v. Cendant Corp., F.d, - (d Cir. 000) (same). Importantly, the Supreme Court in Dura did not define the substantive or temporal parameters of the evidence that plaintiffs must ultimately offer to prove loss causation. Instead, the Court held that plaintiffs may demonstrate that they suffered economic loss as the relevant truth begins to leak out or as the truth makes its way into the market place. S. Ct. at -. The Supreme Court noted that a tangle of factors such as changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events could affect the share price. See id. at. The Dura Court further recognized that fraud-induced inflation could be removed from a company s stock price in a number of ways other than a corrective disclosure. Id. Justice Breyer, the author of the Dura opinion, noted at oral argument that inflation could come out in many different ways, not simply by an announcement by a defendant that I m a liar. Ex. at :-. Rather, inflation could ooze[] out as earnings reports come in, but it has to come out. Id. at :-. Indeed, Cisco s own causation and damages expert, Bradford Cornell, conceded these points during his deposition: Q:... Under your understanding of what s required under Dura, does the company have to have a direct mea culpa admitting to the fraud followed by a single drop in stock price? A: No. I don t think that s necessary. * * * Q:... Would you agree with me that inflation can be removed from a stock in many different ways? A: Yes. I think so. All exhibits referenced are attached to the Evidentiary Appendix in Support of Plaintiffs Oppositions to Defendants Motions for Summary Judgment. CAUSATION - C-0-0-JW(PVT) - -

10 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 Q: You would agree with me also... that the truth can leak out over time? A: Yes. Q: [Y]ou would also agree with me that it can leak out over time, not simply by an announcement that I m a liar; the company committed fraud? * * * A: It is possible that the truth can leak out over time, yes. Ex. at :-:. Thus, contrary to the erroneous standard urged by defendants, the Supreme Court declined to adopt a rule requiring proof of a corrective disclosure which is the linguistic mirror image of the fraud and their own expert conceded as much. Nor did the Supreme Court require plaintiffs to prove an explicit corrective disclosure of the fraud as the mechanism by which the truth leak[ed] out. See, e.g., In re Enron Corp. Sec., No. MDL-, 00 U.S. Dist. LEXIS 0, at * (S.D. Tex. Dec., 00) ( It is notable that the Supreme Court did not affirmatively adopt Dura Pharmaceuticals argument that a plaintiff must allege and ultimately prove that the defendant made a corrective disclosure of the fraud that was followed by a related price drop.... ). To the contrary, the Supreme Court held [w]e need not, and do not, consider other proximate cause or loss-related questions. Dura, S. Ct. at -. The Dura Court had good reason for refusing to adopt a stringent and inequitable rule requiring that a corrective disclosure constitute the mirror image of an earlier misrepresentation. Sophisticated individuals who choose to manipulate the market by committing fraud are likely to be adept at concealing it as well. See In re Elec. Data Sys. Corp. Sec. & ERISA Litig., F. Supp. d, 0- (E.D. Tex. 00) ( Defendants cannot escape liability for fraud simply by not admitting The Dura defendants (and Dura s numerous amici in the securities and business arenas) had urged stringent loss causation/proximate cause rules that would have required proof of a direct tie between any subsequent stock decline and a previous misrepresentation. Professor John C. Coffee, Jr., whose article, Causation by Presumption?: Why the Supreme Court Should Reject Phantom Losses and Reverse Broudo, urged the Supreme Court to require a stock drop tied to a corrective disclosure, recently admitted that Dura is a minimalist text, which holds only that payment of an inflated purchase price, without more, does not by itself constitute an actionable economic loss. Ex.. CAUSATION - C-0-0-JW(PVT) - -

11 Case :0-cv-0-JW Document Filed 0/0/00 Page of the fraud. ); Freeland v. Iridium Word Commc ns, Ltd., F.R.D 0, 00 U.S. Dist. LEXIS, at * (D.D.C. 00) ( reading Dura to require proof of a complete, corrective disclosure would allow wrongdoers to immunize themselves with a protracted series of disclosures ). Yet again, Cisco s own expert Cornell concedes this fact, writing cases in which a company announces A and then announces strictly that A is not true are rare. Ex. 0 at. As discussed in the expert report of Dr. Blaine Nye ( Dr. Nye ), market valuations are based upon expected future cash flows discounted by the cost of capital. Ex. at (Expert Report of Blaine F. Nye). Fraudulent schemes, like that engaged in by Cisco, manipulate stock market price increases by artificially raising cash flow expectations. Id. at -. Conversely, cash flow expectations can just as easily be lowered to reduce fraud-induced inflation without an overt disclosure of the fraud by defendants issuing further statements true or false that on their face may or may not appear to be directly related to the original fraud. So long as cash-flow expectations reasonably provide some indication of the true state of defendants operations, however, earlier false statements that misrepresent a company s financial condition may be regarded as having caused 0 Cornell testified: Q: And you would agree with me, would you not, also, that rarely is one outright lie by a company revealed through one correction? A: That s still been my experience. Q: And that s your view as you sit here today? A: I think so. Yes. Q:... cases in which a company announces A and then announces strictly A is not true are rare? A: That s been my experience. Q: Still your view today? A: Still my view. Ex. at :-. CAUSATION - C-0-0-JW(PVT) - -

12 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 plaintiffs loss. Id. at -; Ex. at - (Rebuttal Expert Report of Blaine F. Nye); Daou, F.d 0. This logical interpretation of loss causation was embraced by the Ninth Circuit in Daou a decision that followed the Supreme Court s Dura opinion. In Daou, plaintiffs alleged that defendants fraudulently inflated the price of Daou s stock by improperly recognizing revenue before it was earned in violation of Generally Accepted Accounting Principles ( GAAP ). The district court dismissed plaintiffs complaint, however, reasoning: It is undisputed that Daou s Q financial results were dismal, and that this led to the precipitous drop in the Company s stock value. However, in the [complaint], Plaintiffs have not adequately been able to link the decline in share price to any purported improper revenue recognition by Defendants.... Notably, the [complaint] does not allege that there were any negative public statements, announcements or disclosures at the time the stock price dropped that Defendants were engaged in improper accounting practices. Id. at -. The Ninth Circuit reversed and rejected the district court s mechanical insistence on an explicit disclosure, holding that the price of Daou s stock fell precipitously after defendants began to reveal figures showing the company s true financial condition. Id. at. The court found the company s failure to meet its Q projected earnings, the revelation that its operating expenses were deteriorating, and an analyst report questioning whether Daou was properly recognizing revenue, were sufficient to show that the drop in Daou s stock price was causally related to Daou s financial misstatements reflecting its practice of prematurely recognizing revenue before it was earned. Id. That defendants did not admit to improper accounting or issue a restatement did not prevent the Daou court from finding that the revelation of a company s true financial condition in contrast to earlier representations can be deemed a corrective disclosure that causes plaintiffs loss. See In re VeriSign Corp. Sec. Litig., No. C 0-00 JW, Order (N.D. Ca. Apr., 00) (applying Like the district court (whose analysis the Ninth Circuit rejected), the Daou defendants stressed that there was never any disclosure of the alleged accounting violations that could have caused the stock drop. See Ex. at ( The truth that was revealed had nothing to do with revenue recognition... the fact remains that Daou never has announced any change in its revenue recognition practices ); Ex.. CAUSATION - C-0-0-JW(PVT) - -

13 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 Daou and holding that VeriSign s revelation of its true financial condition, analysts reaction, and the resulting decline in VeriSign s stock price sufficiently alleged loss causation) (Ex. ). Several other post-dura decisions are in accord with Daou s holding that a corrective disclosure need not mirror the subject of the alleged misstatements in order to show loss causation. For example, in In re Loewen Group Inc. Sec. Litig., F. Supp. d (E.D. Pa. 00), defendants moved for summary judgment on plaintiffs claim that the company s failure to account properly for imputed interest on zero interest finance plans inflated its earnings and publicly filed financial statements, artificially inflating the company s stock. Id. at. The Loewen plaintiffs alleged that the artificial inflation was removed from the stock via two disclosures: () a September press release disclosing $0 million in charges for reserves and other adjustments that did not specifically mention imputed interest on the company s zero percent finance plans; and () a announcement that third quarter earnings were expected to be significantly below consensus analyst forecasts, which did not mention... that the failure to meet expectations was a result of further improper accounting of imputed interest. Id. The Loewen court rejected defendants assertion that summary judgment was warranted because plaintiffs allegedly failed to link the drop in stock price to the subject of the alleged misstatements: Plaintiffs have met their burden regarding loss causation... by alleging that they purchased TLGI stock at an inflated price and lost money when the price fell. They allege that the stock price fell as a result of defendants failure to properly record imputed interest, and have offered enough evidence on that point to survive summary judgment. Id. at. The Loewen court s denial of summary judgment based on two disclosures that did not mention specific accounting manipulations or constitute a restatement reinforces Daou s holding that a company s failure to meet the market s expectations may constitute the disclosure of a company s true financial condition without mentioning accounting improprieties. Notably, the Loewen court denied summary judgment even though plaintiffs had yet to offer expert testimony linking the stock price decline to the subject of the misstatements unlike plaintiffs here, whose expert Dr. Nye conducted an event study and regression analysis to demonstrate loss causation See F. Supp. d at. CAUSATION - C-0-0-JW(PVT) - -

14 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 Similarly, in In re Bristol-Myers Squibb Sec. Litig., No (SRC), 00 U.S. Dist. LEXIS (D.N.J. Aug., 00), the court denied defendants motion for summary judgment on the element of loss causation. There, the defendant company s stock price dropped after it announced that it was withdrawing a new drug from the FDA approval process. The defendants argued that this was not a corrective disclosure because it failed to reveal that defendants prior statements regarding the drug s prospects and side effects were false. Id. at *0-*0. The court held that neither Dura nor the Second Circuit s decision in Lentell v. Merrill Lynch & Co., F.d (d Cir. 00), stood for the general proposition that an alleged corrective disclosure must be the linguistic mirror image of the alleged fraud. Bristol-Meyers, 00 U.S. Dist. LEXIS, at *. The court reasoned that [t]aken as a whole, however, as it was presented to the market, the disclosure is perfectly congruent to the alleged fraud, and noted that the fact that the stock price fell without a more complete and detailed disclosure, if anything, only goes to show that the tip of the iceberg was enough [to] cause the loss. Id. at *-*. Numerous other post-dura decisions are in accord. See In re Winstar Commc ns, No. 0 CV 0 (GBD), 00 U.S. Dist. LEXIS (S.D.N.Y. Feb., 00) (holding loss causation established despite the absence of a restatement or other disclosure concerning the company s alleged accounting improprieties); Montalvo v. Tripos, Inc., No. :0CVSNL, 00 U.S. Dist. LEXIS, at *-* (E.D. Mo. Sept. 0, 00) (holding loss causation established notwithstanding the fact that the corrective disclosure failed to disclose that the miss was caused by improper accounting and the fact that defendants did not issue a GAAP restatement until two years later); In re JDS Uniphase Corp. Sec. Litig., No. C 0- CW, 00 U.S. Dist. LEXIS 0, at *-*0 (N.D. Cal. July, 00) (finding that the company s statements that it would not meet projections constituted a corrective disclosure of the alleged misstatements that the company fraudulently recognized revenue by overstating demand for its products and the value of its The Bristol-Meyers court further rejected defendants argument that because the alleged corrective disclosure is general enough to cover subjects other than those allegedly concealed, there is no way to prove that the market reacted to [the] alleged truth, among the many other subjects that the statement could have been addressing. 00 U.S. Dist. LEXIS, at *. CAUSATION - C-0-0-JW(PVT) - -

15 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 inventory because it was a subsequent disclosure of JDS s true financial health ) (quoting In re JDS Uniphase Corp. Sec. Litig., No. C0- CW, 00 U.S. Dist. LEXIS 0, at * (N.D. Cal. Jan., 00)). This Court has already adopted the principle embedded in Dura and embraced in Daou that fraud-based inflation can be removed from a stock, and thereby cause plaintiffs economic loss, by means of a disclosure of a company s true financial condition when the corrective disclosure is not the linguistic mirror image of the earlier fraud. See Dura, S. Ct. at -; Daou, F.d at. In Cisco s Motion for Judgment on the Pleadings, which this Court denied in its entirety, defendants argued that plaintiffs could not prove loss causation as to the categories of misstatements made by Cisco, including accounting improprieties and false statements about the strength of Cisco s business, because Cisco s February, 00, announcement supposedly did not correct or directly relate to the subject of the misstatements. See Cisco, 00 U.S. Dist. LEXIS, at *-*. Relying expressly on Daou, however, this Court rejected defendants argument because plaintiffs properly alleged that: () Cisco s misstatements and omissions inflated Cisco s stock; and () there was a steep drop in the price of Cisco s stock after Cisco Defendants began to disclose the alleged truth about its financial condition. Id. at * (citing Daou, F.d at ). C. Plaintiffs Evidence Creates a Genuine Issue of Material Fact that Cisco s February, 00, Disclosure of Its True Financial Condition in Contrast to Defendants Earlier Misrepresentations and Omissions During the Class Period Caused Plaintiffs Economic Loss Clinging to the same flawed premise already rejected by this Court when it denied defendants Motion for Judgment on the Pleadings, defendants assert that summary judgment must be granted because nothing [in Cisco s February, 00, announcement] can be characterized as disclosing the truth about the specific matters allegedly misrepresented by defendants i.e., purported accounting improprieties, problems with particular products or acquisitions, or false Defendants in the present case contend that Dura requires the corrective disclosure to directly relate to the putative misstatement.... Defendants argue that plaintiffs in this case have merely alleged that the purported disclosures had a negative effect on Cisco s stock price, rather than the requisite corrective effect. Cisco, 00 U.S. Dist. LEXIS, at *-*. CAUSATION - C-0-0-JW(PVT) - -

16 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 information about the strength of the Company s business. Cisco s Motion at ; PWC s Motion at -. Defendants were wrong when they relied entirely on this argument in their Motion for Judgment on the Pleadings, and they are still wrong. Plaintiffs evidence is more than sufficient to raise a triable issue of fact as to whether defendants misstatements artificially inflated Cisco s stock, and that this inflation was removed from the stock on February, 00, after Cisco revealed its true financial condition in stark contrast to defendants earlier misstatements.. Defendants Use of Their Causation and Damages Experts Opinions to Purportedly Undermine Plaintiffs Credible Evidence of Loss Causation Creates a Battle of the Experts that Precludes Summary Judgment Preliminarily, it must be noted that defendants attacks on plaintiffs loss causation evidence and plaintiffs damages expert s analysis are founded upon the opinions of their respective opposing experts, Cornell and Christopher M. James. See Ex. at - (Expert Report of Bradford Cornell); Ex. at (Expert Report of Christopher M. James). The Ninth Circuit holds that conflicting expert witness testimony raises a triable issue of fact for the jury to decide, so long as the expert offers an opinion that the courts have not rejected as a matter of law. Wyler Summit P ship. v. Turner Broad. Sys., F.d, (th Cir. 000) ( Weighing the credibility of conflicting expert witness testimony is the province of the jury ); see also Spirit Airlines, Inc. v. Northwest Airlines, Inc., No. 0-, 00 U.S. App. LEXIS, at *-* (th Cir. Dec., 00) (holding that intellectual disagreement among the parties experts creates material factual disputes... so as to preclude an award of summary judgment ). District courts within the Ninth Circuit are in accord. See Ritchie v. United States, No. C MHP, 00 WL, at * (N.D. Cal. May, 00) (holding that the evaluation of competing expert testimony is an issue of fact left for the jury and not for the court to decide upon a motion for summary judgment); Manchak v. N-Viro Energy Sys. Ltd., F. Supp., (C.D. Cal. ) (holding that the court cannot determine credibility or act as a fact finder when there is a dispute amongst experts over a material fact); Tran v. Captain Glyn, Inc., 0 F. Supp., (D. Haw. ) (holding that summary judgment is inappropriate because the disagreement amongst experts creates an issue of fact for the jury to decide). CAUSATION - C-0-0-JW(PVT) - -

17 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 This principle has been applied numerous times by courts in securities fraud class actions to preclude summary judgment on the issue of loss causation. E.g., In re Initial Pub. Offering Sec. Litig., F.R.D., - (S.D.N.Y. 00) ( Although defendants present a cadre of experts clamoring to apply alternative methods of determining loss causation, now is not the time to weigh conflicting evidence or engage in statistical dueling of experts.... [T]hese attacks go to the weight of [plaintiffs expert s] conclusions and must be reserved for trial. ); In re Worldcom, Inc. Sec. Litig., F. Supp. d, 00 (S.D.N.Y. 00) (holding that conflicting expert reports are the function of the jury and are not appropriately resolved on a motion for summary judgment ); In re Ribozyme Pharms. Sec. Litig., 0 F. Supp. d 0, (D. Colo. 00) (same). Given that numerous courts have expressly approved the use of event studies and regression analyses (like that used by plaintiffs expert Dr. Nye) to measure the inflationary effect of companyspecific information and calculate plaintiffs economic loss, no reasonable argument exists that plaintiffs expert offers an opinion that the courts have rejected as a matter of law. See Wyler Summit, F.d at ; In re Gaming Lottery Sec. Litig., No. Civ. (RPP), 000 U.S. Dist. LEXIS, at *-* (S.D.N.Y. Feb., 000) (an event study [is] an accepted method for the evaluation of materiality damages to a class of stockholders in a defendant corporation ), vacated, remanded sub nom. on other grounds, F.d (d Cir. 00); In re Blech Sec. Litig., No. Civ. (RWS), 00 U.S. Dist. LEXIS 0 (S.D.N.Y. Mar., 00) (holding Dr. Nye s event study methodology valid for calculating damages in securities fraud class action); RMED Int l, Inc. v. Sloan s Supermarket s, Inc., No. Cir. (PKL) (RLE), 000 U.S. Dist. LEXIS, at * (S.D.N.Y. Apr., 000) (event study deemed reliable in securities fraud class action). Accordingly, defendants attacks on plaintiffs loss causation evidence simply highlights a disagreement among conflicting experts that is inappropriate to resolve at summary judgment.. Plaintiffs Evidence Creates a Triable Issue of Fact Concerning Whether Cisco s February, 00, Disclosure Related to the Subject of Defendants Earlier Misstatements Plaintiffs have proffered more than sufficient evidence illustrating that a material issue of fact exists as to whether Cisco s February, 00, announcement removed the price inflation caused by defendants earlier misstatements. To begin, plaintiffs retained Dr. Nye to provide expert testimony CAUSATION - C-0-0-JW(PVT) - -

18 Case :0-cv-0-JW Document Filed 0/0/00 Page of on the issues of causation, materiality, market efficiency, and damages. Dr. Nye is a financial economist and has served as an expert witness in the area of causation and damages in numerous securities fraud class action cases. Ex.. Dr. Nye conducted an event study and regression analysis which: () captured the reaction of Cisco s stock price to the defendants material misstatements and omissions; () calculated the artificial inflation in Cisco s stock price caused by defendants statements and omissions; and () identified the subsequent dissipation of that inflation from Cisco s stock price when Cisco finally revealed its true financial condition and prospects on February, 00, relating to defendants misstatements and omissions made throughout the Class Period. Id. at, -. Based on this study, Dr. Nye first opines that the following categories of misstatements and omissions were material to investors decision to buy Cisco stock: (a) Cisco s guidance for revenue and earnings growth; 0 (b) Cisco s reported financial results, including revenues, net income, and earnings per share for fiscal 000 and first quarter fiscal 00; (c) (d) (e) (f) Id. at,. the orders and demand for Cisco s products; the reasons for and the impact of the growth in Cisco s inventories; the appropriateness of Cisco s accounting for inventories; and the appropriateness of Cisco s accounting for its vendor financing program. Dr. Nye opines that each of these misstatements and omissions were material to investors, and had a corresponding impact on Cisco s stock price: Id. at. Share price is a function of a company s expected future economic earnings, i.e., of expected future cash flow to investors.... In other words, a firm s share price is the present value of future economic earnings expected by its equity investors, discounted for risk and time value of money. Unless the market has reason to believe a company s future financial performance will be significantly different from its present financial performance, the market will look to the company s periodic reports of financial performance and guidance from company managers as important indicators of its financial health and earnings prospects. Market participants rely on statements made by company managers and representatives. Market participants also rely on the opinions of a company s CAUSATION - C-0-0-JW(PVT) - -

19 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 Id. at. Id. at. independent auditors for assurance that the company s financial statements accurately and reliably report its financial performance. A reasonable investor would have wanted to know the information misrepresented during the Class Period, including information that would have revealed Cisco s true financial condition and Cisco s prospects. Investors rely on corporate earnings announcements, published financial statements, and other news disseminated by a company as accurate and reliable representations of the true financial condition, performance, and prospects of a company in making their investment decisions. It would have been materially important to investors to know the Company s true financial condition and prospects, and to know that information disseminated by Cisco and Defendants misrepresented the Company s true financial condition and prospects, during the Class Period. Specifically, Dr. Nye focuses on the fact that demand was misrepresented by defendants from November, 000, onward, and that defendants GAAP violations caused Cisco s net income to be overstated by % to % on a pro forma basis, and by % to % on a GAAP basis, during the Class Period. Id. at ; Ex. at,,. He opines: Because of the false and misleading statements proffered by Cisco and the Defendants during the Class Period, market participants were led to believe that Cisco s earnings were greater than its true earnings and its future revenue and earnings growth rates were forecasted to be greater than would be expected based on information known solely by Cisco and certain Defendants and not disclosed to the public during the Class Period. Ex. at. Dr. Nye concludes that those misstatements and omissions caused Cisco s stock price to be inflated during the Class Period. Id. at, -. Dr. Nye then details how from December 000, through February, 00, the artificial inflation was removed from Cisco s stock through a series of disclosures of the truth relating to the misstatements and omissions made by Cisco during the Class Period: From December 000, to January 00, information was disseminated to the public related to the deteriorating financial condition and prospects of Cisco. Cisco stock declined in price as new information was revealed.... Yet, the price of Cisco s stock was still artificially inflated because Defendants only partially disclosed the true state of Cisco s business. Then, on February, 00, Cisco reported its second quarter fiscal 00 results, which were below the consensus of analysts expectations, and reduced guidance for revenue and EPS for the third and fourth quarters of fiscal 00. As a result, the price of Cisco common stock declined dramatically. On February, 00, Cisco revealed its true financial condition and prospects which surprised investors, causing the price of the common stock to CAUSATION - C-0-0-JW(PVT) - -

20 Case :0-cv-0-JW Document Filed 0/0/00 Page 0 of 0 Id. at. decline. Had Cisco and Defendants reported Cisco s financial condition and prospects truthfully during the Class Period, Cisco stock prices would have been lower than the prices at which the stock actually traded. Class members losses were incurred when the price inflation in Cisco common stock that resulted from, among other things, the alleged misleading statements published during the Class Period prior to the time of purchase, was eliminated when Cisco s true financial condition and prospects were revealed and the stock price fell. Dr. Nye further opines that on February, 00, Cisco corrected its omissions and misstatements through two key disclosures: its failure to meet analysts projected earnings per share ( EPS ), and Cisco s reduced guidance of flat-to-down % growth for the next two quarters of fiscal year 00. Dr. Nye opines that the market was surprised by this truthful information and that, as a result, analysts reduced their revenue forecasts by % for fiscal year 00 and % for fiscal year 00, reduced their earnings forecast by % for fiscal year 00 and % for fiscal year 00, and lowered recommendations. Id. at. Dr. Nye calculates that Cisco s February, 00, correction of its fraudulent misstatements and omissions resulted in a % stock price decline net of market and industry factors, thereby causing plaintiffs loss. Id. at.. Plaintiffs Evidence Raises a Material Issue of Fact as to Whether the February, 00, Announcement Caused the Market to Question the True State of Cisco s Business and Removed the Price Inflation Caused by Defendants Earlier Misstatements Defendants repeatedly assert that Cisco s February, 00, announcement could not have caused plaintiffs loss because Cisco s earning miss and revised future guidance resulted from an abrupt macroeconomic industry slowdown. But as the evidence shows, plaintiffs will be able to prove at trial that Cisco s excuse is not a valid one. For example, although not required under Dura or Daou to prove loss causation, analyst reaction to the disclosure of the true state of a defendant s business can bolster a finding of loss causation. See Daou, F.d at. Here, following Contrary to defendants contention, plaintiffs continue to assert that in December 000, and January 00, Cisco made partial corrective disclosures, but decided not to include these disclosures in plaintiffs calculation of damages because they were very limited disclosures. Had plaintiffs not taken this conservative approach, the estimated damages would be even higher. Ex. at,. CAUSATION - C-0-0-JW(PVT) - -

21 Case :0-cv-0-JW Document Filed 0/0/00 Page of Cisco s February, 00, announcement, analysts questioned the veracity of Cisco s publicly stated excuses for its earnings miss and revised guidance: We believe that this slowdown [in revenue for FY00 and FY00 can be attributed to Company specific issues including: [i] [ii] Aggressive price discounting and financing; Cisco s concentration on CLEC customers which has created an as yet unquantifiable potential of receivables write-offs and missed sales quotas; [iii] We believe that Cisco s inability to deliver best-of-breed optical and routing technologies has limited sales to CLECS (financed sales) and the distribution arm tier one providers. 0 Ex. at -00. [Cisco] [e]xecutives said the downturn was especially noticeable among upstart providers, like independent DSL providers which have been having trouble raising additional funding from investors. At least a half-dozen DSL firms have shut down or sought bankruptcy protection in recent months.... * * * The U.S. economy is slowing down faster than anyone anticipated, said Chief Executive Officer John Chambers.... * * * But rivals Nortel Networks of Canada and Juniper Networks in Sunnyvale recently beat Wall Street estimates, raising questions of whether Cisco has lost its edge. This appears to be a Cisco-only issue, said Paul Johnson, an analyst for Robertson Stephens... It is pretty disappointing. Ex. 0, File 0-00 at -. While Cisco is clearly suffering from a slowdown in the U.S., we were disappointed in how the company has managed expenses and inventory during this process.... We view the inventory management at Cisco a real problem that is more a function of poor execution than a macro-economic issue. Ex. at. These analyst reports, which question the veracity of Cisco s excuse for its earnings miss and revised guidance, create, at the very least, a dispute of fact as to whether Cisco s stock price fell as a result of a macroeconomic industry slowdown, as defendants contend, or because the true state of Cisco s business finally came to light, as plaintiffs contend. While Cisco never explicitly admitted CAUSATION - C-0-0-JW(PVT) - -

22 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 to fraudulently overstating demand or engaging in accounting manipulations, the market conspicuously questioned whether the true state of Cisco s business was as previously represented by defendants. This fact goes directly to the heart and subject of all of plaintiffs allegations, i.e., that Cisco did not disclose material information to the market relating to the demand for its products and its accounting that would have caused the market to revalue future cash flows and subsequently remove the artificial inflation by repricing the stock. Although not required, the fact that the market did engage in such an inquiry after Cisco s February, 00, announcement creates more than a genuine dispute of material fact that Cisco s announcement was corrective of its previous misstatements. See Daou, F.d at ; VeriSign, Order at (holding that the disclosures of VeriSign s financial condition and analyst reaction to this disclosure is sufficiently similar... in Daou to find that the plaintiffs have adequately pled that their losses were proximately caused by [defendants ] scheme ).. Plaintiffs Have Proffered Credible Evidence that Cisco s February, 00, Announcement Was a Revelation of the True State of Cisco s Business in Contrast to Earlier Misstatements Relating to the Strength of that Business Defendants raise several arguments for the proposition that plaintiffs cannot show loss causation with respect to misstatements concerning the demand for Cisco s business. Each fails. First, defendants contend that Cisco s February, 00, announcement cannot be a corrective disclosure of their misstatements relating to demand because Dr. Nye purportedly attributed the inflation in Cisco s stock solely to Cisco s misstatements relating to accounting. Cisco s Motion at. Defendants are wrong. Dr. Nye s report states that the omissions and false and misleading statements concerning Cisco s financial performance and prospects for future performance, including those related to demand, were material and artificially inflated Cisco s stock price. Ex. at. Dr. Nye then states plainly that his allocation of the price decline on February, 00, included a correction of Cisco s misstatements relating to demand : The misstatements and omissions include financial results that related to different aspects of Mr. Regan s accounting overstatements and also include statements and omissions relating to declining demand for Cisco s products.... [T]he full CAUSATION - C-0-0-JW(PVT) - -

23 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 percentage drop taken back to November, 000, is based not only on accounting misstatements but a failure to disclose declining demand for Cisco s products. Ex. at. Id. at. Dr. James claims that my analysis shows a reliance on accounting misstatements as the primary driver of the Cisco stock decline on February, 00. This is incorrect since Plaintiffs also allege declining demand for Cisco products and their knowledge in November 000, of these adverse facts. I do not need to parse the earnings miss and revisions to guidance disclosed by Defendants on February, 00, as the two topics are inextricably related to all of Plaintiffs allegations, e.g., impact of declining demand on Cisco s business operations, that Cisco would not be able to sell a substantial portion of its inventories, and that Cisco misstated its financials. Id. at. Accordingly, defendants assertion that Dr. Nye failed to allocate any stock price inflation to Cisco s demand statements must be rejected. Defendants experts disagreement with Dr. Nye which Dr. Nye successfully rebuts does nothing more than create material factual disputes that precludes summary judgment. Wyler Summit, F.d at. Next, defendants contend that no loss causation exists because nothing said on February suggested that prior statements regarding the extraordinary demand for Cisco s products... had been inaccurate. Cisco s Motion at. First, the disclosure of the earnings shortfall and reduced guidance based on a slowdown in business is clearly related to demand. Whether defendants had knowledge of this slowdown (which plaintiffs believe they will prove at trial) when they spoke to the market in November and December 000 about demand, or whether the slowdown occurred only in the last week of Q0, as defendants assert, is an issue of fact. In addition, although not required, plaintiffs have presented credible evidence that, as a result of Cisco s February, 00, announcement, the market questioned whether the demand for Cisco s product was as high as previously reported, and further questioned whether Cisco had properly adjusted to a perceived slowdown in sales both of which further bolster a finding of loss causation: Inventory turns marked a sharp decrease in the quarter because of two factors. First, component supply agreements, signed during the summer of 000, when the market was booming, are now resulting in sharply increased levels of raw materials (Cisco s management said it is working with suppliers to adjust order levels). Second, the production plan was not adjusted enough over the course of the quarter to reflect more properly the slowdown of business, resulting in increase finished goods inventory (there was an associated increase in inventory reserves too). CAUSATION - C-0-0-JW(PVT) - -

24 Case :0-cv-0-JW Document Filed 0/0/00 Page of 0 The second factor raises a question, what happened with Cisco s near real time accounting system? Ex. at. While Cisco s downturn can be traced to the same economic forces hampering other networkers, there s an impression that the company is infused with a high degree of hubris and wishful thinking. They had ample opportunity to adapt their forecast, said Tim Smith of Gartner Group Dataquest. Ex. 0, File 0-00 at -. The slowdown caught Cisco on the hop. In spite of its famous internal controls based on internet technology the group had been ramping up production during the early part of the quarter for demand that never materiali[z]ed. Id., File -00 at -. The miss is particularly significant for a company that closes its books on a daily basis. We had expected a downturn but admit that it arrived with more severity and speed than expected. Ex. at. Revenue by Segment:... Access which represented % of total revenue, declined by % sequentially and grew by 0% compared to last year. This decline was driven by weakness in the dial, DSL, and cable market. Id. at -. Id. at. Id. at. Cisco delivered surprisingly poor Q0 results.... Furthermore Cisco, gave stark guidance for the remaining two quarters of FY0 I ve followed the company since it went public, and I ve never seen a down sequential revenue quarter, said Paul Johnson, a financial analyst at Robertson Stephens. That took me by surprise. This evidence directly rebuts defendants claim that the market made no connection between Cisco s earnings miss and revised guidance and Cisco s earlier statements emphasizing the strength of its business. See Cisco s Motion at -. Clearly, the market was questioning demand levels, and expressed visible annoyance with defendants previous false representations of high demand. Moreover, defendants own expert concedes that if defendants Class Period statements regarding the demand for Cisco s business were false, then the February, 00, announcement is a corrective CAUSATION - C-0-0-JW(PVT) - -